Describe the auditors responsibility regarding noncompliance with laws by a client

Auditors Responsibilities for Noncompliance with Laws and RegulationsClient’s noncompliance with laws and regulations can cause financial statements to be martially misstated andexternal auditors are advised to be aware of circumstances that could indicate noncompliance.Auditing Standards deal with two types of noncompliance:Direct effect noncompliance: which produces direct and material effects on financial statement amounts thatrequire the same assurance as errors and fraudsIndirect effect noncompliance: which refers to violations of laws and regulations that re not directly connectedto financial statements.Indirect effect compliance may be fundamental to operations, fundamental to company’s ability to continue businessor necessary to avoid material penalties.Auditors must respond to noncompliance or suspected noncompliance identified during the audit. First, they mustgain an understanding of nature and circumstances of noncompliance and then evaluate the possible effect onfinancial statements.

External auditors always have the option to withdraw from an engagement if management and directors do not takesatisfactory action under any circumstances.When an auditor believes that there is illegal act which has material effect on financial statements, the board ofdirectors has one business day to inform the U.S. Securities and Exchange Commission (SEC).If board of directors decide not to inform SEC, then the auditors must:Within one business day give the SEC the same report they gave to board of directors.Resign from engagement and within one business day, give SEC the report.Audit Strategy MemorandumThe important planning information and serves to document that auditors have followed auditing standards includesa description ofaudit strategy.If the auditors identified fraud risk or other significant risks or noncompliance with laws and regulations, they addressthem in strategy, including the possibility of adding fraud specialists to the team or by expanding testing.Establish a overall audit strategy. the auditor should:Reporting objectives of engagement and the nature of the communications required by auditing standards.Factors that are significant in directing the activities of engagement teamResults of preliminary engagement activities and auditor’s evaluation risk assessment.The professional auditing standards require awritten auditplan that documents the audit strategy on eachengagement.

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• 1 Auditors' Responsibilities Regarding Laws and Regulations
• 1.1 Responsibilities of management
• 1.2 Responsibilities of the auditor
• 1.3 Audit procedures

Auditors' Responsibilities Regarding Laws and Regulations

Responsibilities of management

Management are responsible for ensuring the entity they are responsible for complies with relevant laws and regulations, including:

• Company law, e.g. the UK Companies Act 2006;
• Corporate Governance law, e.g. the US Sarbanes Oxley Act 2002;
• Health and safety law;
• Employment law;
• Stock exchange rules; and
• Financial reporting regulations.

This requires the monitoring of legal requirements, the development of systems of internal control to ensure compliance and an effective system of assessing the effectiveness of those control systems.

Responsibilities of the auditor

The auditor is responsible for obtaining reasonable assurance that the financial statements taken as a whole, are free from material misstatement, whether caused by fraud or error (ISA 200).

Non-compliance with laws and regulations can impact the financial statements because companies in breach of the law may need to make provisions for future legal costs and fines. In the worst case scenario this could affect the ability of the company to continue as a going concern.

In addition the auditor may need to report identified non-compliance with laws and regulations either to management or to a regulatory body, if the issue requires such action. An example of the latter would be when the client is in breach of money laundering regulations.

Therefore, in planning an audit of financial statements the auditor must take into account the applicable legal and regulatory framework.

More specifically the auditor must obtain sufficient, appropriate evidence regarding compliance with those laws and regulations generally recognised to have a direct effect on the determination of material amounts and disclosures in the financial statements.

The auditor must also perform specified audit procedures to help identify instances of non-compliance with those laws and regulations that may have a material impact on the financial statements. If non-compliance is identified (or suspected) the auditor must then respond appropriately.

Audit procedures

ISA 250 Consideration of Laws and Regulations in an Audit of Financial Statements requires an auditor to perform the following procedures:

• obtaining a general understanding of the client's legal and regulatory environment;
• inspecting correspondence with relevant licensing and regulatory authorities;
• enquiring of management and those charged with governance as to whether the entity is compliant with laws and regulations;
• remaining alert to possible instances of non-compliance; and
• obtaining written representations that the directors have disclosed all instances of known and possible non-compliance to the auditor.

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